Bob Pricer was famous for striding back and forth in front of business school students, making loud pronouncements on one thing or another. He’d earned it. The founder of half a dozen successful businesses, and named by BusinessWeek as one of the best business school professors in the country, after his retirement in 2002, the University of Wisconsin named a chair in entrepreneurship scholarship after him.
As one of his many students, one pronouncement I remember best was him bellowing, “Cash is king!” while thrusting an index finger into the air. “Most businesses go out of business because they don’t have enough cash on hand!” he would regularly remind us. We acolytes would madly scribble this into our notebooks, dramatically underlining it.
If cash is king in business, publicly-traded cannabis companies are desperately looking for a new crown, since they’ve been experiencing a cash squeeze in the era of Coronavirus.
And because they’re public, stock price is a public company’s raison d’etre, and the stock prices aren’t great. Green Thumb Industries (GRBIF) is among the best at $7.04, down from $15.10 a year ago while Harvest Health and Recreation (HRVSF) is at 70-cents, down from $9.33 a year ago. A year ago, more than 20 cannabis companies were valued at more than $1 billion. Today there are seven.
In recent months, nine-figure mergers or acquisitions – including Chicago-based Verano’s $850 million planned sale to Harvest Holdings – collapsed as public cannabis companies no longer have easy access to equity markets.
Privately-held cannabis companies right now have the advantage of focusing purely on cash flow and operations rather than new industry growth that pleases investors.
In Illinois, so far in the era of Coronavirus, the cannabis industry is growing nicely (albeit not spectacularly):
- Sales in Illinois saw a modest, but noticeable 3% month-to-month increase last month.
- The basic per-pound price of cannabis in Illinois is higher than many other states, offering plenty of incentive to increase supply.
- Cultivators are planning to expand their facilities this year.
- Existing dispensary owners are opening more stores.
- Thousands of applicants are expected to submit paperwork for new dispensaries, craft grow, and infusion facilities on May 1.
Even without access to the public markets or traditional bank loans, there are still plenty of financing opportunities for privately-held cannabis companies. Sector-specific Real Estate Investor Trusts like Chicago-based NewLake capital are funding expansion costs through sale and lease-back transactions. Venture capital firms and early-stage individual investors are still active in the space, and by design remain highly opportunistic. Anecdotally, many private cannabis companies seem to be backed by deeper-pocketed investors who have access to plenty of cash from other, previously successful non-cannabis businesses, and have more cash-access levers to pull than public companies might.
Here’s one. Let’s say you’re a cannabis investor that owns a decently-sized non-cannabis company with some hard assets and decent cash flow. Your smaller cannabis company needs capital to grow. So you, non-cannabis company owner, decide to take a personal loan from your non-cannabis company at a low interest rate. Maybe that loan even comes from your non-cannabis company’s credit line? Then, you turn around and make an equity cash investment into your cannabis company. Some time later the cannabis company pays the investor a dividend, and the investor pays back his non-cannabis company’s loan.
How often is this going on? Hard to say, since it’s all private. But if anything, the Coronavirus era might usher in a new era of slow-and-steady private business growth, instead of explosive, merger-fueled public companies reliant on equity markets.